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Law Student, Symbiosis Law School, Pune
Batch of 2008-13
A Note On The Amendment of 2013 of The Securitization And Reconstruction of Financial Assets And Enforcement Of Security Interest Act, 2002
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is an Act which lays down a relatively simple procedure for banks and other financial institutions to recover their debts from borrowers. It provides for circumstances and procedure as to how a lender can recover a non-performing asset without substantial involvement of the courts of law. The Act empowers lenders to take possession of the borrowers’ property, take control of the management of the borrowers’ business etc. in satisfaction of the debt of the lender.
The Act was recently amended in January 2013 by The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2011. The act brought about the following major changes in the SARFAESI Act:
• The lenders will be allowed to convert any part of the debt of the defaulting company into equity. Such a conversion would imply that lenders would tend to become an equity holder rather than being a creditor of the company.
• It allows banks to bid for any immovable property (of the defaulting borrower) they have put out for auction themselves, if they do not receive any bids during the main auction. In such a scenario, banks will be able to adjust the debt with the amount paid for this property.
• Multi state Co-Operative Banks are now included within the meaning of “a bank” under this Act.
• A securitization or reconstruction company may have its name substituted in place of the name of the original lender in any pending suit in the D.R.T. or D.R.A.T. This may be done either by the company or the tribunal suo-moto.
• In case of multiple creditors, Rights can be exercised by the individual creditors only if that creditor represents at least 60% of the debt amount.
• The Amended Act allows a secured creditor to file a Caveat in the D.R.T., if an appeal is expected to be preferred against it based on of the proceedings of the lender under the Act. Once such caveat has been filed, the borrower has to inform the creditor details about the appeal that he will be filing/already filed.
• The Act provides that the secured creditor can seek the assistance of the District Magistrate to take possession of a secured asset. The amendment has laid down certain guidelines as to when such assistance can be asked for. The creditor has to furnish an affidavit stating that the debt is proportional to the property being possessed, the borrower has indeed defaulted in payment of the debt, the borrower has created a security interest over the property, the borrower has been served a 60 day notice before taking any action under the act etc. These requirements have been laid down to ensure that there is no action on the part of the bank which is not justified. If the bank takes any action with the assistance of the District Magistrate based on false allegation, it can be held accountable later on.
• If the lender fails to inform the Central Registry/Central Government about the securitization of an asset as laid down in Sections 23, 24, 25 of the Act. The Court can take cognizance of such an offence only with the approval of the Reserve Bank of India or the Central Registry. Also such cognizance can be taken only by a court not inferior to a Metropolitan Magistrate/Judicial Magistrate. Also if there has been a defect in filing details about creating a security interest, the same can be rectified at a later date by the applicant on application to the Central Registry.
The Act has been criticized till date because it does not take into account the interest of the borrower’s, on account of it being arbitrary and biased towards lenders. Borrowers are however, allowed to appeal against the action taken by the lenders by virtue of Section 17 of the Act, which lays down circumstances in which such an appeal, can be preferred. The Courts through various judgments have interpreted the Section 17 of the Act in a liberal way so as to give relief to borrowers in many circumstances. In spite of that, appeals rarely get accepted and in certain circumstances banks even get the opportunity to rectify the matter against which the appeal has been preferred.
The Amendment of 2013 to the Act has brought about many major changes in the procedure of recovery of non-performing assets. However, the major amendment that was needed was putting in place more safeguards to protect the rights of the borrowers and curbing the arbitrary misuse of powers by the lenders. The same has not been done.
An in-depth analysis of the new amendments, with respect to the rights of the borrowers reveals the following:
• Section 18C of the new Act allows for the filing of a caveat by the lender in cases in which an appeal is expected, takes away a major portion of the rights of the borrowers, as they will be unable to procure an ex-parte order if a caveat has been filed and the tribunal will compulsorily be required to hear the lender. The Caveator in such a circumstance shall have full opportunity to oppose any order which might be adverse to its interests.
• Section 14 of the new Act can be considered to be a major safeguard for the rights of the borrower. According to this section the lender has to submit via affidavit exhaustive details of the property that is sought to be possessed. The details have to satisfy the conditions laid down in the Act which allows the lenders to take possession of a defaulting borrower’s asset. This clause ensures that lenders do not proceed to take action based on partial satisfaction of the requisite conditions. Strict adherence to provisions of the Act regarding taking possession is emphasized.
• Once an asset has been securitized and the same has been registered with the Central Registry, the procedure to cure any default on the part of the securitization company, in the process of securitization is quite complicated and it requires approvals of the R.B.I. and can be heard by a superior court only. Lenders are given full liberty to cure defects in securitization applications at a later date which an added advantage is given to them to escape from penalties. This again allows for the suppression of borrowers interests, as the process of rectifying fallacies if any in the securitization process is quite complicated and it may be difficult to take action against defaulting securitization companies in most cases.
• In the case of an unsuccessful auction of a non-performing asset, banks are allowed to buy the said asset at the reserve price set by them, which is beneficial for them as they can satisfy that debt with their own money. This enables the bank to secure the asset in part or complete fulfillment of the defaulted loan. Banks can then sell off this property to a new bidder at a later date to clear off the remaining portion of the debt, if any. Previously there was almost always a delay in the selling off of a property as buyers did not want to buy debt assets in auctions. This gave the defaulting lenders a window of opportunity to satisfy their debts and recover their property. However, now that the lenders themselves are allowed to buy out the assets, they may do so in most cases leaving the borrowers hardly any time to settle their debts.
• The clause which allows the lender to acquire equity in the defaulting borrower’s firm upto the extent of the debt allows the lender to effectively take control of the borrowers company in certain circumstances. This is again a serious drawback in the new law which greatly prejudices the interests of the borrower. In certain situations the lenders may end up procuring major controlling shares in the company in the event of a large loan default. On the other hand lenders in many situations may not want to exercise this right as it would involve buying taking control of equity of a company, whose share value may already have been greatly eroded due to the loan defaults on the part of the borrower.
The Amendment of 2013 to the SARFAESI Act in essence is similar to the earlier act, mainly because the act continues to be greatly partial towards money lenders like before. The Act gives blanket powers to banking institutions to recover their non-performing assets by suppressing the rights of the borrowers. The lenders are allowed wide discretionary powers to the method in which they would like to recover their debt.
A direct outcome of the draconian SARFAESI Act is the advent of unregistered financial institutions. These organizations put lenders in a much more secure position as the borrowers assets are not in threat of being possessed and they are given other options in case of a loan default.
While the aim of the Act is mainly to ensure that errant borrowers are effectively penalized and the lenders can recover their debt effectively. There is a lot of scope to make regulations to curb the excesses on the part of the financial institutions.
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